How US States Are, and Aren't, Easing Crypto Firms' Compliance Burden

CSBS will make it easier for crypto companies to prove they’re in compliance with state regulations, but they’ll still have to apply for each state’s license first.

AccessTimeIconSep 18, 2020 at 10:02 a.m. UTC
Updated Sep 14, 2021 at 9:57 a.m. UTC
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The Conference of State Bank Supervisors (CSBS), an organization of state financial regulators, will make it easier for financial technology payment firms and cryptocurrency exchanges to prove they’re in compliance with U.S. state laws.

The CSBS announced a “One Company, One Exam” plan Tuesday whereby states will coordinate their supervisory exams for the nation’s largest payment firms in an effort to reduce the costs on both state regulators and the companies they oversee. Essentially, the exam is how these regulators will make sure regulated entities are still in compliance.

What this means for cryptocurrency companies – such as Coinbase – is their compliance costs will drop. Rather than work with more than 50 different state and territory regulators, the exchanges only need to check in with the one group. The group of regulators includes every state but Montana, which doesn’t have a money transmission license.

Crypto exchanges need money transmission licenses to legally operate within most states, with the state banking or financial services regulator overseeing this form of regulated activity.

“For the industry that means there’s going to be a reduction in regulatory burden,” said Matt Lambert, nonbank counsel for CSBS. 

However, new exchanges will still have to apply for, and secure, a license for each state in which they hope to operate. While the CSBS is working on a potential standard for applications, there’s still a long way to go. 

At present the move also only applies to the 78 largest money transmitters in the U.S. – those operating in at least 40 states. While Lambert declined to identify which crypto businesses fit into this category, a search of the Nationwide Multistate Licensing System & Registry database indicates this could include Coinbase, Circle Internet Financial and Square. 

The list of firms that will benefit from CSBS’ announcement could still grow. While there aren’t any plans right now to add to the list of companies, Lambert said more could be added later on.

‘Strictest standards’

The CSBS announced its effort to consolidate supervision at least partly as a result of soliciting feedback from the crypto industry, and finding that regulated entities believed “there is too much supervision that is accomplishing the same thing,” Lambert said. 

“Overall I think this process will lead to high standards, the strictest standards,” he said. “This is not going to be a means of defaulting to the lowest standards, this is going to be a method of raising the bar for everyone.”

Each exam will be conducted by a group of state regulators, and the makeup of the group will change on an exam-by-exam basis. This lets the regulators coordinate among themselves to find the best fit for each company’s evaluation. 

One state will lead the other group members in administering each exam.

Daniel Gorfine, the former fintech innovation lead at the Commodity Futures Trading Commission and a director with the Digital Dollar Project, told CoinDesk the move helps in the development of regulations around fintech.

“This approach would be similar to the dual banking system, which recognizes state and federally chartered banks and has been effective in safely promoting competition, innovation and choice both for consumers as well as industry,” he said.

Linda Lacewell, Superintendent of the New York Department of Financial Services, echoed his view, saying on Twitter a dual banking system is needed as states better understand their local ecosystems.

Lowered costs

By coordinating, the states are able to save their own resources.

Lambert said the different states will be able to reduce their supervisory costs because they won’t have to conduct every exam.

“If you only have one exam nationwide you can make sure the best examiners are at that exam and can leverage the resources of the states,” he said.

Lacewell said on Twitter the move would also “reduce burdens on the industry.”

Regulated companies will also find their own bills reduced, said Brian Nistler, an attorney with Lowenstein Sandler. He told CoinDesk the first effect is “an overdue reduction in compliance costs and regulatory redundancies for money service businesses and the state regulators.”

This is especially important because costs for the crypto industry have “ballooned” over the last few years, he said. As a result, entities have been asking for the exams to be streamlined for some time now.

Circle CEO Jeremy Allaire agreed, saying in a statement the move would streamline his company’s efforts to work with state banking regulators. 

He said the new framework indicates “very significant progress for crypto and fintech firms.”

“[It ensures] that there is a consistent and well-run process for examining firms and ensuring that they can meet their regulatory obligations,” he said.

National framework

What Tuesday’s announcement does not do is create a national framework for crypto companies. However, it is the latest move in a years-long effort to more closely coordinate between the states, Lambert said. 

“The states have been working together in the supervision of money transmitters for a long time. Originally it was through the money transmitter regulators association and they continue to work through the states,” he said. 

A possible next step may come through the creation of a multi-state licensing agreement. This project, which has also been in the works for some time, has about 29 states on board so far. 

It’s unclear whether such an effort would negate the need for a federal charter, as Acting Comptroller of the Currency Brian Brooks has suggested. As detailed, his proposed charter would allow fintech firms to bypass the state-by-state framework entirely.

Nistler noted that when the states were writing their various money transmitter license regulations, “no one thought the states would be responsible for regulating borderless online platforms,” which was a view Gorfine shared.

Kristin Smith, the executive director of the Blockchain Association, said a national framework or federal law is still needed. “It makes little sense to have a patchwork of regulation and supervision,” she said. 

Brooks congratulated CSBS for its announcement, but also indicated he agrees with the idea of a federal authority overseeing payment firms. 

“While the efforts alleviate some of the inherent challenges facing a system based on 50 state laws and licensing regimes, only federal law and the uniform regulatory framework it provides fully addresses these issues,” he said in a statement.


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